quote:

ORIGINAL: samboct

http://www.latimes.com/news/nationworld/nation/la-na-obama-taxes16-2009apr16,0,2423838.story

Unfortunately, Obama's plan is just tinkering around the edges.  As a small business owner, I can tell you what the problem is and why we've got an increasing gap between the rich and the poor- it's the taxes for social security/medicaid/medicare that go under a variety of names including social security, or more honestly for small businesses- the self employment tax.

I'm a dinosaur- I do my own taxes- no paid tax preparers, accountants or even Turbo tax.  I want to see how things operate, and the best way to do that is to get your hands dirty.  So here's what I've discovered...

The self employment tax is one of the main reasons new businesses fail.  It's also highly regressive, taking a big chunk out of those who can least afford it.  It's 14.5% of all profits that come out of a small business (sole proprietor) which is capped at $102,000.  This tax kicks in if you can't afford to put gas in a car- it's a bite that allows no minimum standards for living. 

What aggravates me is that people are monkeying around with the income tax code.  OK, it may be cumbersome and overly complicated- but it's not fundamentally unfair.  It's not regressive, it allows for people at the low end of the income scale to pay no tax- which I think is fair, and allows the folks who are scrambling to pay a smaller percentage of what they've got- which also allows them some financial prudence to put away some savings for low spots in a business- like many of us are having now.  If my business would only have to pay income tax, state tax, local property tax,  business entity tax, business registration, gas tax, tolls,  etc. things would be looking a lot more hopeful than they are now- but that damn self employment tax basically doubles my tax burden.  I think people at the lower end pay a higher percentage of taxes than they realize.  Note that my definition of tax is any money collected by a government to provide a service.

The tweaks in the tax code may be nice- but odds are they don't make or break a business.  However, I'm sure that a lot of businesses have gone under once they realize that between 25-33% of the profit -even when you're barely above poverty level- is going to taxes- most of it this self employment tax.  The reason that people who work for another company don't realize this often is because their employer pays half, so they don't get stuck with the whole tab.

I've been furious with the AARP for years.  From my perspective, all they've done is bellyache how poor seniors are living in poverty on what little social security gives them.  They've used this politically powerful bellyaching to keep demanding increases in the social security/self employment tax.  They've rejected any type of compromise-things like the Concorde coalition to means test social security was an anathema to them.  Well, they've become an anathema to me- and to you other folks who are trying to make a buck in today's world- they should be a problem for you too.  We've seen the result- the rich have gotten richer and the poor have gotten poorer.  Too many failing businesses- inadequate capitalization to make it through a downturn because saving money is near impossible.  I'd prefer to see an increase in the income tax and a decrease in this self employment tax if anybody's asking me- but they aren't.


Sam

quote:

ORIGINAL: DomKen

But you assume the small business has a net profit of 100k per year. Which is highly unlikely for a small start up or a sole proprietorship trying to grow.

Fundamentally the FICA and associated taxes are the most regressive federal taxes and due to the caps actually favor the high earners over everyone else. Changing the rate to make it progressive to the present max rate and removing the cap would improve Social Seciurity's future solvency issues and better distribute the tax burden.